Purpose & Structure of the Statement

Concept

Why Cash Flows Matter

The statement of cash flows explains the change in cash and cash equivalents over a period. While the income statement measures profitability using accrual accounting, the cash flow statement reveals actual cash movement. A profitable company can still run out of cash if receivables are slow or capital expenditures are high.

Example

Three Sections

1. Operating Activities — cash from core business operations (sales collections, payments to suppliers/employees) 2. Investing Activities — cash for long-term assets (buying equipment, selling investments) 3. Financing Activities — cash from owners and creditors (issuing stock, borrowing, paying dividends)

Key Point

Cash Equivalents

Cash equivalents are short-term, highly liquid investments readily convertible to cash with maturities of 3 months or less (e.g., money market funds, Treasury bills).

Operating Activities — Indirect Method

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Practice questions from this module to reinforce what you learned.

Practice Questions